This article was contributed by the Industry Information Unit, Business Competitiveness Division, Department of Industry, Science and Resources.

INTRODUCTION

The construction industry, consisting of firms mainly engaged in the construction of residential and non-residential buildings and engineering structures, and in related trade services, is an important part of the economy, accounting for 5.5% of GDP for 1999-2000, and employing almost 8% of the work force in 1999-2000. The industry has important linkages with other sectors, so that its impacts on the economy go well beyond the direct contribution of construction activities. This article first outlines the main features of the performance of the construction industry by mapping the main flows into the industry from other industries, the direct value added by the industry to the economy as a whole, and the broad destinations of its outputs. The article then illustrates the possible extent of the flow-on effects of construction activity on the outputs of other industries

Construction inputs and outputs, and industry performance

Figure 20.7 summarises the inputs to the construction industry, and sources of its unduplicated output or value added to the economy, and the destinations of its outputs. The figure shows:

a breakdown of the goods and services inputs to production for the industry (table 20.8 shows more detail on the major goods and services used by the industry);

the contribution of the main factors of production, labour and capital, in transforming and adding value to the inputs; and

the destinations of the outputs in terms of the activities of consumption, investment, stock building and exports.

The data relate to 1996-97, the latest year for which input-output information is available.

The industry generated value added of nearly $30b, ranking it as one of the five largest industry sectors in the economy. It contributed over 6% of value added of the Australian economy for 1996-97.

The majority of the inputs to the industry (88%) come from locally sourced goods and services. Less than 10% of inputs were imported.

Just over half of the value added of the industry is contributed by capital (as shown by the gross operating surplus (gross profit) of firms in the industry), the balance by labour (as shown by compensation of employees (mainly wages)). This places construction in the average cohort of industries for these measures.

The industry is predominantly its own market - 94% of the output of the industry is directly consumed, 5% is used by other industries, and the remaining 1% is exported.

Over and above the direct contribution of construction activity to the economy, it has 'flow-on' impacts on the activities of other industries. The possible size of these impacts can be illustrated using multipliers based on inter-industry flows in input-output tables. For the construction industry the multipliers can be characterised as follows:

the initial effect - an initial $1m of extra output of the construction industry, and related employment in the industry to produce that output;

aproduction induced effect - the combination of:

thefirst round effect - the amount of output and employment required from all industries that supply goods and services to the construction industry in order for that industry to produce the initial $1m of extra output;

an industrial support effect - the induced extra output and employment from all industries to support the production of the first round effect;

a consumption induced effect- the subsequent inducement for extra output and employment due to increased spending by the wage and salary earners across all industries arising from the compensation received for their labour as part of the other effects above.

Table 20.9summarises the multipliers for output and employment in the construction industry. They show that, for every $1m spent on construction output (houses, non-residential buildings, etc.) in 1996-97, a possible $2.9m in output would be generated in the economy as a whole, giving rise to 9 jobs in the construction industry (the initial employment effect), and 37 jobs in the economy as a whole from all effects.

Theseflow-on effects are made up as follows. The initial effect of the additional construction is $1m. The first round effectfor this additional construction would be the increased value of activity of around $0.5m in those businesses manufacturing the materials needed for the additional construction, such as concrete and steel frames. The businesses supplying and servicing the concrete and steel frame businesses, such as aggregate quarrying and raw steel production, experience an increased demand for their products and services. Thisindustrial support effect is estimated to be an additional $0.4m. As activity has increased in the construction industry, as well as in the suppliers to that industry and the suppliers to the suppliers, there is an increase in wages and salaries to employees in this chain. The spending of these wages and salaries induces a further round of consumption effects in other areas of the economy totalling an additional $1m.

Care is needed in interpreting multiplier effects; their theoretical basis produces estimates which somewhat overstate the actual impacts in terms of output and employment. Nevertheless, the estimates illustrate the high flow-on effects of construction activity to the rest of the economy. Clearly, through its multipliers, construction activity has a high impact on the economy.